13 Straddle Strategy • Suppose you think interest rates will change, but are unsure about the direction … • What is the payoff profile if you were to buy call and put at the same strike price? • Buying this straddle will cost .42 + 1.065 = 1.485 Bond Price Payoff 121.5

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16 Straddle Strategy • Suppose you has sold a straddle 2 days ago … • Value of the underlying bond has increased to from 121.202 to 122.015, in decimal points .3692 cent • At what price can you buy back the straddle? • Call Option on Nov 1, .424, Call Option on Nov 3: .505 • Put Option on Nov 1, 1.065, Put Option on Nov 3: .565 • What happened?

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